HSBC rocked by claim of investment bank’s ‘failure’

When Philip Noblet quit as HSBC’s most senior UK dealmaker last month, he told friends that he feared executives might soon embark on another retreat from investment banking.

With its $2.6tn balance sheet, a world-leading trade finance franchise and a dominant position in the Hong Kong market, HSBC should have the muscle to break into the top echelons of advising companies on mergers, acquisitions and fundraisings.

Yet over the years, these costly attempts to take on the likes of Goldman Sachs have invariably fizzled, without making significant inroads, leading to an apparently ambivalent attitude from senior management.

Now the bank’s remaining dealmaking team has entered another period of gloomy introspection after a leaked memo from unnamed HSBC executives claimed that its investment banking strategy had “utterly failed” and its “performance is really appalling”.

The memo — which is being treated as a whistleblowing event by the bank, with its claims examined in a formal process — has ignited a frenzy of speculation in the City of London about the future of HSBC’s investment bank. Internally, senior executives describe the memo as “trash” and “lacking substance” to back up its criticism.

Entitled “Global Banking & Markets: Rewards for Persistent Failure”, it is dated August 25 and addressed to HSBC’s new chief executive John Flint, chairman Mark Tucker and other board members. It said: “The division’s leadership has, year-on-year, utterly failed to create a successful strategy. We are entirely fed up and demoralised and have no confidence at all in the existing leadership.”

“Unlike any other bank, there is no proper and effective route to provide upward feedback: hence this memo, which is whistleblowing on incompetence,” it added.

The Financial Times has spoken to more than a dozen current and former HSBC executives. Some said investors had contacted them about the memo. Others said a management shake-up could follow, adding that ultimate responsibility for the division rested with Samir Assaf, head of global banking and markets, even though the memo does not mention him by name.

The former executives said morale in the investment banking and markets unit had plummeted after a string of senior departures, including Mr Noblet, who jumped ship to Jefferies, the US investment bank, and Matthew Westerman, the Goldman Sachs veteran brought in to turn the business round in 2016.

Mr Westerman left HSBC last year after he ruffled feathers with what some considered an abrasive style. Yet he is merely the latest in a line of big name bankers hired to build its global banking unit — which provides companies with M&A advice, acquisition finance, share sales and bond issuance — only to leave a few years later.

HSBC revenues by division

There was a similar outcome after the bank hired John Studzinski from Morgan Stanley in 2003 with a mandate from its then chairman John Bond to hire hundreds of dealmakers. Mr Studzinski left three years later to join US private equity group Blackstone.

Some former HSBC executives said the cut-throat world of investment banking was at odds with its conservative culture, built on the Scottish Presbyterianism of its founders. “It doesn’t have commitment to the business,” said a former HSBC investment banking executive. “There’s no consistent hiring pattern, strategy and no effort to stop factions developing.”

Another executive who recently left the bank said the memo “was written by people who care about the bank and want it to be better”. A third ex-HSBC banker said: “Maybe this will force them to act.”

In contrast to the high staff turnover at most Wall Street and City of London companies, many HSBC bankers have worked there all their career — notably Mr Flint and his predecessor Stuart Gulliver. The bank — sometimes likened to a financial offshoot of the UK diplomatic service — is also known for its aversion to paying high bonuses to poach star dealmakers and its discomfort with the lumpy revenues in investment banking.

“They only do investment banking halfheartedly,” said a senior executive at a rival bank. “HSBC is an inherently conservative institution — it is hierarchical, deferential and bureaucratic.”

After quitting as head of M&A at HSBC in 2015, Andrew Bell told colleagues he grew tired of regularly chairing committees of 25 people, many of whom he considered mediocre.

Based on fees earned from M&A advice, HSBC ranked 38th this year among banks globally, according to Thomson Reuters. Even in the UK it only ranked 14th. The $102m of M&A fees it is estimated to have earned this year is dwarfed by the $1.5bn-$1.8bn collected by market leaders Goldman Sachs, JPMorgan Chase and Morgan Stanley.

HSBC executives point out that they do not pretend to compete with Goldman in M&A advice. Its “event business” — M&A advice, share issuance and acquisition finance — represents only 15 per cent of revenues at its global banking unit.

Ronit Ghose, banks analyst at Citigroup, said HSBC’s core strengths were in corporate and consumer lending, as well as foreign exchange trading and cash management, which meant M&A advice was not a priority. “Even if HSBC makes twice as much money from M&A this year it doesn’t change my view on valuation of the stock,” he said.

For several years, the bank has been slimming down its investment bank and shifting capital to higher returning operations in Asia. Mr Flint outlined a continuation of this strategy in his June investor update, while promising to expand in asset management and insurance — reinforcing the perception that investment banking is an unloved corner of the group.

Some well-regarded investment bankers have moved to other areas of the bank to progress, such as Natalie Blyth, now head of trade and receivables finance.

HSBC rejected many of the allegations in the memo and said: “We are proud of our global banking business and of what Robin [Robin Phillips, the remaining co-head of global banking at HSBC] and his senior leadership team have achieved over the past few years.”

The bank denied it was deaf to staff concerns, pointing to its whistleblowing line called HSBC confidential. It also rejected the memo’s claim that it came “dead last” out of the major wholesale banks on revenue per investment banker, saying that private research by Dealogic and McLagan ranked its staff above average on productivity.

Executives said global banking revenues had risen steadily in the past two years and inched up again to $2.1bn between January and June, when it hired 50 new executives. They said it worked on $4bn of UK share issues this year and on several big deals including the takeovers of Akzo Nobel’s speciality chemicals arm and of Standard Life Assurance.

HSBC said it ranked number one in the world on bond sales and financing acquisitions and leveraged loans so far this year — if the US, Japan, Australia and the Chinese onshore market were excluded.